This paper examines short-selling around negative environmental, social, and governance (ESG) events. Using FIS Global lending and RepRisk incident data, we apply propensity score matching to analyze abnormal returns, short-selling activity, and borrowing rate changes across equity indices in the United States, Europe, and Japan. We provide the first empirical evidence on stock price behavior and short-selling activity around negative ESG events, and offer backtesting results for ESG short-only and long-short strategies using effective borrowing rates. Results reveal regional patterns. In the U.S., evidence shows pre-event price declines and increases in short-selling activity before ESG incidents are disclosed. In Japan, reactions vary by event type and timing, with some co-movement in lending markets. In the EU, responses are shaped by regulatory guidance, with limited lending market effects. Findings highlight regional contrasts in ESG information incorporation and imply that encouraging ESG shorting may enhance market efficiency and autonomy in ESG integration. • The provision of empirical evidence on stock price behavior and short-selling activity around negative ESG events. • The offer of realistic backtesting results for short-only and long-short strategies using effective borrowing rates. • The implication for policymakers that encouraging ESG shorting may enhance market efficiency and autonomy.
Iwata et al. (Mon,) studied this question.